A2 Macro
Revision: Inflation Targets and Measurement
Revision on inflation targets and the inflation measurement issue. Tim Harford’s Radio 4 Programme ‘More or Less’ this week looked at the issue of inflation measurement
Revision PowerPoint
Inflation_Targets.ppt
UK Economy Revision Presentation
During our recent series of revision workshops for AS & A2 Economics, we looked at the key data and trends in the UK Economy.
read more...»No longer over a barrel?
David Smith turns his attention to oil prices in today’s Sunday Times and asks why the spiraling cost of crude has not hit global economic growth and inflation as much as in past oil shocks. Most of the recessions and major slowdowns in the global economy have been pre-dated by spikes in international commodity prices. Has oil now lost the power to shock?
David quotes a new report from the National Institute of Economic and Social Research which mentions the long term decline in oil dependency for the UK economy and the effects of a flexible labour market on wage bargaining power. There are two excellent evaluation points for any essay on oil in the exams this summer.
“Ray Barrell, an economist with the institute, said the big change is that economies are less directly sensitive to oil prices than they used to be. The “energy intensity” of growth – the amount of oil, coal and gas needed to produce an increase in gross domestic product – has halved since the 1970s, reflecting greater energy efficiency and the shift away from heavy manufacturing. Labour markets have also become more flexible, said Barrell, so workers accept temporary reductions in real wages when energy prices rise, while in the past they would have demanded compensation. The wage-price spiral used to mean expensive oil led to inflation, unemployment or both. Central banks now are under less pressure to act to head off the “second round” inflationary effects of dearer oil.”
The rest of David Smith’s article can be read here:
A2 Macro Diagrams
In our revision session today we were discussing which diagrams can be used in A2 macro questions. Here is the initial list we came up with ... can students and teachers suggest more? I will happily put together a powerpoint with the diagrams suggested.
read more...»The Monetary Stimulus
There was no change to UK base interest rates this week with the Monetary Policy Committee holding rates at 5.0% for May. Across the Channel, the hyperactive (!) European Central Bank also kept policy rates constant for what now seems like an eternity! Thank heavens the UK remains outside the Euro Zone! Whilst policy rates are at 5% for the moment, this does not mean that monetary policy is not acting as a stimulus to one or more of the components of aggregate demand (C+I+G+X-M).
The overall stance of monetary policy includes the effects of base rate movements and also changes in the external value of sterling against a basket of other currencies. So whilst interest rates have edged lower in recent months we should also take into account the major depreciation of sterling against the Euro Zone with whome we do more than half of our trade. A falling pound acts as an important stimulus to the export sector of the economy, even though the boost is muted somewhat by a slowdown in economic growth in our export markets. Will the lower pound be a white knight for the faltering UK economy?
Loss aversion and experiences of inflation
Few people believe that the officially published measure of inflation accurately captures their own experiences and problems - this is hardly a surprise since our own spending patterns will rarely correlate precisely with the weights used to calculate the consumer price and retail price index. But there is a real danger that the published inflation figures are losing credibility - and with it comes a risk of a larger-than-expected wage-price effect into 2009.
David Leonhardt writing in the New York Times links aspects of behavioural economics to the vexed question of just how high is inflation. A really interesting piece and well worth reading:
“Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. If you have to sell your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago. There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise.”
Better off out than in?
Yes says Ambrose Evans-Pritchard in his piece in the Telegraph today arguing that the UK economy might have been dealt a much tougher blow from the fallout from the credit crunch had we been locked into the single currency zone. I have been discussing this with my A2 students this morning. When external shocks occur, the key to stabilising prices, demand and output is to have a flexible supply-side, fiscal policy autonomy and control over monetary policy. The UK has all three to a reasonable degree and I cannot help thinking that the sliding sterling-euro exchange rate is key to all of this.
Ambrose writes: “As Neil Mellor from the Bank of New York Mellon points out, the pound has been perfectly hedged in this cycle. Sterling has fallen hard against the euro, giving a shot in the arm to British manufacturers (yes, they still exist, 13pc of GDP) who rely heavily on Europe’s markets: yet it remains overvalued against the dollar, softening the effect of oil, metal, and commodity inflation. The shock absorber is working. The Bank of England has already cut rates three times.”
It is interesting when you chat to city and industry economists that discussion of the possible entry of the UK into the Euro Zone is completely off the agenda, the prospect does not exist. The debate has moved on for good.
Does a current account deficit matter?
Yes according to economist Roger Bootle writing in the latest edition of the Deloitte Economic Review and reported in this article from the Financial Times.
“Britain is headed for its highest peacetime current account deficit and both household and government spending will have to slow painfully to correct it, according to economist Roger Bootle”
read more...»Gordon’s economic history lesson
It cannot have been easy or much fun for the man. Gordon Brown’s appearance on the Andrew Marr show this morning was supposed to have been the start of the big fight-back after the appalling drubbing that he suffered at the polls on Thursday and Friday. But the garbled mixture of reassurance and platitudes about the government ‘feeling our pain’ was distinctly underwhelming. I winced ahfl way through the interview when Brown claimed that the last Labour government inherited high inflation from the Conservatives. This is simply not true. I applaud his decision to give independence to the Bank of England in May 1997, but low and (relatively) stable inflation did not appear miraculously when Blair walked into Number 10 that year - consumer price inflation (the government’s chosen emasure, but not one that most of us now look at with much credence) was already low for some years before 1997 as our chart shows. Inflation targets (introduced in the UK in 1992 after our departure from the ERM) and a favourable mix of disinflationary economic shocks, globalisation and the strong exchange rate combined to give Brown and his Treasury team an inheritance of low inflation when they came to power. Perhaps it was the stress that caused Brown to make such a shocking mistake in his attempt to teach us all a little economic history?
Stabilising demand - will the tax rebate work?
It is an interesting case study in how to stabilise demand and output at a time when consumer confidence is declining and the domestic economy has been hit by a sharp negative shock emanating from the housing market. The fiscal rebates will soon be landing in the post boxes of millions of US households ... the key question is how much of a temporary stimulus will this provide for the economy? The Financial Times has a good article on this today.
“The difference depends on how much of the rebate package will be spent and how much will go on imported goods. It is also related to the time-frame over which it is spent, and whether this expenditure will, in turn, trigger knock-on spending ..... In effect the government will nationalise part of US household debt – socialising some of the costs of the economic downturn. In doing so it may reduce the risk of a sudden pull-back in spending by overstretched consumers, even if it does not actually boost spending by much. Analysts estimate anywhere from 20 per cent to 50 per cent of the rebates will be spent over a period of four to six months.”
The impact will depend on the marginal propensity to save and spend the extra income and also the marginal propensity to import goods and services. With a weaker dollar raising the prices imported products, perhaps the propensity to import might be a little lower at this key stage of the economic cycle? The tax rebate is also targeted at Americans on incomes below the top of the pay ladder - whose marginal propensity to spend might be expected to be higher than the super-rich.
According to ABC news:
“More than 130 million U.S. households are eligible for the checks. Individuals could get up to $600, couples up to $1,200 with an additional $300 per child. In total about $120 billion will be doled out over the next two months.”
The rest of the FT article is here
US economy awaits stimulation from Bush’s tax rebate (Guardian)
